infonet-economy

We analyze the relationships among the three main strategic goals of every company: growth, profitability, and safety. Extant literature suggests that the relationships among these goals are two-directional and reciprocal. We therefore first-time develop a simultaneous equation model to empirically test three pairs of relationships simultaneously. We use a sample of 3,031 European insurance companies and account for firm characteristics, market conditions, and firm-year fixed effects. Our results suggest that a healthy growth has a positive impact on firm profitability; however, extremely high growth reduces the profitability. Furthermore, in line with the prospect theory, insurance companies tend to adjust their risk taking according to whether targeted profit-ability is reached. Our results emphasize existing results on underwriting discipline and that stra-tegic actions have to be coordinated to manage the trade-offs among growth, profitability, and safety.